IIFL Capital Services Limited (IIFLCAPS) Earnings Call Transcript

Good afternoon, friends. Thank you for joining the fourth quarter analyst call for IIFL Securities. I'm R. Venkataraman, Managing Director of IIFL Securities. Along with me are my colleagues, Ronak Gandhi, who is Chief Financial Officer; and Anup Varghese, who heads Investor Relationships in our groups. Thank you for joining us on the Q1 FY '22 analyst call. I also take this opportunity to wish all of you a very good health. And I hope that all your near and dear ones continue to remain safe. The Indian economy is seeing a recovery from the impact of the second wave. And we hope that the pandemic situation is soon brought under control. And as we see faster vaccination rollouts across the country. The Indian booking industry has seen a big transformation in the last 12 months. We have rapidly moved from call and order to click and order. Our trade volumes have increased. Tech savvy brokers offering a smooth experience to the retail customers have boosted retail participation. The Indian stock market is in midst of its big -- 1 of the biggest bull runs till date. And over a year, from the pandemic lows in March of last year, the indices have more than doubled and many stocks, blue chips included, have seen their prices jump very sharply in the last 1 year. Our strategy continues to be built on research and technology. We have [indiscernible] in capital markets, because of our research and understanding of the economy and corporate, and that is a big help to our business line, because the business lines have centered around capital markets. We continue to scale up our efforts to acquire customers and we also continue to invest in technology to make sure that the retail customers especially have a seamless trading experience. Just a quick recap. As you are aware, we have 3 different revenue streams. One is retail broking, which is targeted at mass affluent. We offer them not only broking, but also other products like what we call a financial product distribution, like mutual funds, insurance, PMS, and we have an open architecture model. The other line of business is, of course, institutional broking. We are the port of first call for all leading domestic and foreign institutional investors. And that is primarily on the back of our research capabilities and trade execution capabilities, especially in block deals. The third, of course, is investment banking, where we are focused on equity capital markets, which is IPO and QIP. And in this segment, we are quite uniquely placed, because of our ability to garner subscription, be it retail, HNI or institutions. Post the restructuring of the group, we are now focused on the agency business. And we believe in open architecture distribution model and our focus is on the fee-based income. Coming to our results for the June quarter, consolidated revenues came at INR 268 crores, which is up 50% year-on-year and 5% quarter-on-quarter. Year-on-year, we have seen an increase in the brokerage income. Brokerage income has gone up almost 40% to INR 129.24 crores in this quarter versus INR 91-odd crores in the quarter last year. Investment banking again has increased manyfold. We have seen a sharp jump in investment banking revenues from virtually 1 very insignificant negligible in first quarter of FY '21 to INR 23 crores in this quarter. Distribution income has increased almost 131% from INR 21 crores in the previous year to INR 49 crores this quarter, and that was primarily driven by a combination of sale of high-end products like PMS, et cetera, and also distribution of fixed income products like NCDs, MLDs et cetera. Quarter-on-quarter basis, brokerage has increased 4%, which is basically INR 124 crores to INR 129 crores. Investment banking has decreased 37%, which has -- which was almost INR 36 crores in the previous quarter to INR 23 crores in this quarter. If you remember, Q4 of last fiscal was extremely good for IPOs and we have seen a big spate of IPOs in the last quarter. Now coming to our FBD income. Again, FBD income also seen a big growth, as I mentioned earlier, because -- that was INR 27 crores for the previous quarter, that is Q4 FY '21, which has become close to INR 50 crores in this quarter. The other income was virtually flat on a quarter-on-quarter basis, and it is down on a year-on-year basis, and that is primarily because if you remember last year, first quarter, we had mark-to-market gains in some investment products. Coming to expenses, our employee cost was up 5% quarter-on-quarter to INR 66 crores, because of increase in headcount. We have seen an increase in headcount to 2,136 from 1,928 and -- which was 1,886 in the first quarter of FY '21. And that was also in this quarter, we have seen salary increments taking place. So the expenses went up on a combination of these 2 factors. And finance cost is flat. Admin cost was up at 13% on a quarter-on-quarter basis, INR 27 crores, primarily on the back of sub-brokerage payout. Year-on-year, the increase has been sharper to 63%. That is a combination of not only sub-brokerage payout, as I spoke, but also due to increase in -- increased spend in marketing as well as technology. Assets under management and custody stood at about INR 55,141 crores. Coming to some other data, average daily turnover for the first quarter was INR 52,791 crores. BSE NSE combined, which was broken into INR 1,968 crores in the cash segment and INR 50,823 crores in derivatives segment. The corresponding figures for the Q4 FY '21 was INR 44,153 crores, which was INR 2,100 crores in the cash segment and INR 42,049 in the derivatives segment. With this, I come to the end of my talk, and the floor is open for any questions that you may have. Thank you so much for giving me a patient hearing.

[Operator Instructions] The first question is from the line of Kajal from ISec.

Congratulations on good numbers. So just wanted to understand your expenses have gone up sequentially. So what would be the reason for that? And have we seen cash volumes recovering post this -- the decline that we have seen?

No. If you see on a quarter-on-quarter basis, items were employee cost, which went up from INR 63 crores to INR 66 crores, which I explained, was a combination of both increase of number of employees as well as the increment cycle, which took place in the last quarter. Finance cost was virtually flat, and fees and commission expenses were also INR 34 crores became INR 45 crores, because of increased subbroker payout and admin costs were more or less flat at INR 40 crores.

Okay. So have we done anything on the sub-broker channel like increasing the number or anything?

Yes, actually, we are focused on increasing the number of sub-brokers and also cater to the sub-brokers, who are actually bid. So both in terms of number of sub-brokers as well as quality of sub-brokers we are working on it. And we also -- if you remember, we are developing this AAA platform, so hopefully, with the combination of these -- all these 3 things, we should see an increase in the B2B segment.

Okay. And on the cash volume, what is the trend?

See, cash volume, if you see for the -- just to give some rough numbers, the average daily turnover for cash in the previous quarter was INR 2,100-odd crores, which fell to INR 1,969 crores. So if you look at it, we have seen some increase in our retail market share, but in the industrial segment, the nature -- because of higher passive flows where we don't have a significant presence, we have lost the market share there.

The next question is from the line of Sahej Mittal from HDFC Securities.

So first question is a broad question around your -- the nature of customers which we are acquiring. So could you give me with -- the customers which we had acquired about a year ago during the pandemic. So what was the nature of those customers? Were they day traders or were they long-term investors? And is there any shift in the nature of trading of those customers? And secondly, is there any -- so there's an increase in the number of customers, which we have seen in the recent months. So what's the nature of these customers? That would be the first question.

Okay. If you see the -- our customer acquisition trend for the last maybe 4 quarters, we are roughly hovering at about 1 lakh customers. And this quarter which went, we have seen a spike to 1,50,000 customers. And if you see, we were a full service brokerage. And in the recent past, we have seen a spate of media articles, which talk about the rise of the millennials, the rise of the do-it-yourself customer with a discount broking kind of pricing structure. So we have multiple channels. We have a relationship manager channel. We have sub-broker channel. We have direct, and we also have a DIY channel. And in the previous call, if you remember, I'd spoken about offering a flat brokerage scheme, which is primarily targeted at the do-it-yourself customer. So we are seeing a healthy mix of all the 3 segments. And to answer your second question, the nature of these customers are -- that more of -- most of them are -- I don't know how to explain, but trading in the derivative segment, and that is primarily a reflection of what's happening to the overall market also. Because you can see the overall market also about close to about 97%, 98% of trade is actually happening in the derivative segment. But we also have a healthy base of customers, who trade with a long-term perspective in the cash segment. So it's like a -- so the answer to the long -- the short answer to your question is that we have seen a mix of all kind of customers and it's very difficult to take a call whether we are getting each type of customers. But the broad nature of the customers is that most of them want to trade in derivative segment.

And sir, second question would be around your customer acquisition cost. So now we have seen a spike in your execution, your marketing cost has gone up in this quarter. So can you give us some color on what does your customer acquisition cost look like? If you would give some greater sense versus discount broker or say a full-time bank broker like ISec. So how does your customer...

I don't have the data about -- what is the approximate cost of customer acquisition for bank brokers or other brokers. But my guess is that we are roughly in the INR 1,500 acquisition cost.

And sir, are there -- is there any economies of scale playing out if the -- suppose the number of customer acquisitions go up? Or is this the broad range, which it will remain at, that is INR 1,500 per acquisition?

So we have am ambition to grow these numbers. So obviously, we won't stay at this level, but let's -- so these numbers should increase in days to come.

The next question is from the line of Rishikesh Oza from RoboCapital.

Sir, my first question is how much are you looking to add from Karvy in revenue terms?

Yes, actually, to be very honest, sir. As we speak, we are in the process of migrating customers of Karvy to us. And so hope -- and last quarter was the first quarter where we were trying to migrate. So it is still early. Hopefully, the end of this quarter, the next analyst call, I'll be able to share more data on the actual conversions and all that. Initial trend has been quite optimistic, although brokerage income from this set of customers has not been any write to home about.

Okay. And sir, the customers that we acquired this quarter around 1,50,000. So does it also include the Karvy ones that we have acquired or like they have opened their trading account?

No, this will include some Karvy customers also, although I don't have the exact breakup of what exact percentage of this is Karvy.

Okay. And sir, any update on the property sales?

So as you know, that we have been selling property. And last quarter also, we sold 1 property. So as of now, we are roughly about 6 lakh square feet. And as we said in the call also that we are in the process of selling. So last year, we had sold One Synergy, which was a big property, others are small, small ones. So we are continuing our efforts to exit real estate as we can.

[Operator Instructions] The next question is from the line of Kajal from ISec.

Sir, what will be your technology expense that we may be having in our total cost, largely?

See, I think roughly last quarter, technology cost would be about INR 12 crores to INR 15 crores per quarter on the basis.

Hello, sir, I could not listen.

INR 12 crores to INR 15 crores in a quarter.

Okay. Okay, sir. Okay. Sir, apart from that, the INR 1,500 crores -- INR 1,500 cost of acquisition, which you mentioned, what may be the breakeven period that we will be seeing there, generally for a customer?

On a historical basis, the breakeven is about 12 to 15 months.

Now also it is the same?